Bad debt write off in Canada: get the income and GST back.

Most small businesses eventually have a customer who simply doesn't pay. The real sting is that, if you invoiced them, you probably already paid tax on that income and remitted the GST. A proper bad debt write off in Canada lets you reverse both, but only if you do it the right way and keep the paper trail.

This guide explains when a debt counts as bad, how the income tax and GST rules work, walks through a worked example with journal entries, and shows how to handle it in QuickBooks Online. It's based on Canadian rules, so it applies equally to a consultant downtown and a contractor in Fort Saskatchewan.

1When can you claim a bad debt write off in Canada?

Two conditions have to be true, described generally:

• The amount was included in your income. If you use accrual accounting, your invoice was counted as revenue when you issued it, so there's something to reverse. If you only record income when cash arrives, an unpaid invoice was never in income, so there's no deduction.
• You've reasonably established it won't be collected. The customer has gone bankrupt, closed down, disappeared, or ignored a documented series of collection attempts.

You don't need a court judgment, but you do need evidence. An invoice that's 45 days late isn't a bad debt; it's a slow payer. If you're not sure which accounting method you use, read cash vs accrual accounting in Canada.

2How GST bad debt relief works

When you're GST-registered and invoice a customer, you report the GST in the period you invoice, whether the customer pays or not. If the invoice is never paid, you've sent CRA money you never collected.

The fix is generally available when the sale was to a customer you deal with at arm's length (not a related person or company) and you've written off the debt in your books. You can then deduct the GST portion of the amount written off when calculating net tax for the reporting period in which you wrote it off. In Alberta, with 5% GST, that portion is 5/105 of the GST-included amount.

There's a time limit on the claim, so don't sit on old write-offs. If a write-off is from a few years back, ask your accountant whether it can still be claimed. For the bigger picture on the return, see how to calculate your GST return.

3A worked bad debt write off example

Say you run a small incorporated web design business in Edmonton, GST-registered, using accrual accounting. The figures are hypothetical.

• March: you invoice a client $4,000 plus $200 GST, total $4,200.
• April: the client pays $1,050, then stops responding.
• May to October: you send reminders, call, and send a final demand letter. No reply. The company's website and phone go dark.
• November: you decide the remaining $3,150 is uncollectible.

Working out the split

• GST portion: $3,150 × 5/105 = $150
• Revenue portion: $3,150 − $150 = $3,000

The write-off entry, dated in November

The $3,000 expense offsets the income you reported in March, so you're only taxed on what you actually collected. The $150 reduces the GST you owe for the period that includes November. Accounts receivable for that customer drops to zero.

If the client pays after all

Say the following spring the client resurfaces and pays $1,050 toward the old balance. Record it as a recovery, not as a new sale:

The recovered amount is taxable again, and the GST portion ($1,050 × 5/105 = $50) goes back on the GST return for the period you received it.

4Doubtful accounts vs bad debts

There's a middle ground between "slow payer" and "gone for good": an invoice you think probably won't be paid, but you haven't given up on. Accountants call that a doubtful account.

At year-end, your accountant may record an allowance for doubtful accounts, an estimate of how much of your receivables won't be collected. It reduces accounts receivable on the balance sheet without writing off any specific invoice, so your customers' balances stay open and you keep chasing them.

• Bad debt: a specific invoice you've established is uncollectible. Written off in your books, GST relief generally available.
• Doubtful account: an estimate of likely losses. The tax rules for deducting a reasonable reserve are different, and there's no GST relief until you actually write the debt off.

For most small businesses with a handful of customers, the allowance is a year-end decision for your accountant. Your job during the year is to keep the AR aging report accurate and flag invoices that look shaky, so the conversation at year-end is quick.

5Common bad debt mistakes

• Deleting or voiding the invoice. This rewrites a past period. Your March revenue and GST change in QuickBooks, but the GST return you already filed doesn't, so the two no longer agree.
• Writing off the full amount to expense. If you skip the GST split, you lose the GST recovery and overstate the expense.
• Writing off too early. A debt that's simply slow isn't bad yet. Write it off when you can show it's uncollectible.
• Claiming a bad debt you never reported as income. Cash-basis businesses usually have nothing to write off.
• No paper trail. File the reminders, emails and demand letter with the invoice. CRA expects records to be kept for six years.
• Treating a recovery as a new sale. It works out similarly in income but confuses customer history and reports.

6Writing off a bad debt in QuickBooks Online

QuickBooks doesn't have a single "write off" button for Canadian GST, so bookkeepers usually use one of two approaches.

Option 1: a credit memo (most common)

• Create an expense account called Bad debts in your Chart of accounts.
• Create a non-inventory or service item called Bad debt that points to that account.
• Create a credit memo for the customer, dated in the current period, using the Bad debt item for the pre-GST amount with GST applied.
• Apply the credit memo to the open invoice through Receive payment, so the invoice shows as closed.

This reduces accounts receivable, records the expense, and reduces the GST in the period you write it off, which flows to your GST report. Some accountants prefer the GST portion shown as a separate adjustment on the return; the amount you owe is the same either way, so ask yours which they want.

Option 2: a journal entry

A journal entry like the one in the example works too, using accounts receivable with the customer named on the line. Make sure the GST portion hits your GST payable account and that it shows up when you prepare the GST return.

Before either one, run the Accounts receivable aging report so you're writing off the right invoices. Our guide to accounts receivable bookkeeping covers how to keep that report clean.

Preventing the next one

The cheapest bad debt is the one you never have. Take a deposit on larger jobs, invoice promptly, state your payment terms clearly on every invoice, and follow up the day an invoice goes overdue rather than a month later. For repeat customers who start paying slowly, pause new work until the balance is current.

7Before you write off an invoice

Plum tracks receivables monthly and handles write-offs and GST adjustments for businesses in Edmonton, St. Albert, Fort Saskatchewan and Sherwood Park. If old unpaid invoices are clogging your books, book a call and we'll clear them properly.

8Questions people ask

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This article is general information for Alberta businesses and isn't tax or legal advice. Rules and thresholds change, so confirm your situation with your accountant or CRA.